Compute the present value of the remaining lease payments

Assignment Help Finance Basics

Reference no: EM131421241

Watts Motors plans to acquire a building and can either borrow cash from a bank to finance the purchase or lease the building from the current owner. The sales price of the building is $149,388. If the company wishes to finance the purchase with a bank loan, it must sign a ten-year note with a face value of $149,388 and a stated interest rate of 12 percent. If the company leases the building, it must make an annual lease payment of a constant-dollar amount for ten years, at which time the building can be purchased for a nominal fee.

a. Compute the annual lease payment that would make the two alternatives equivalent. Ignore the nominal purchase fee at the end of Year 10.

b. Describe how the timing of the cash flows would differ between the two alternatives.

c. Provide the journal entries that would be recorded when the building is acquired if the company (1) finances the purchase with a bank loan, (2) leases the building and accounts for it as a capital lease, or (3) leases the building and accounts for it as an operating lease.

d. If the company leases the building and accounts for it as a capital lease, compute the balance sheet value of the lease liability after the second lease payment.

e. Compute the present value of the remaining lease payments as of the end of the second year.

Reference no: EM131421241

Questions Cloud

How the value of bonneville’s debt would be affected : The company's financial managers are seeking ways to reduce the risk related to the value of the debt fluctuating over its life as market interest rates change.

What other factors might influence stevens decision : Potency and efficacy are two of the most misunderstood concepts in the area of drug use. Many overdoses occur because the potency of the newly purchased drug is higher than that of the previously used drug. These concepts apply to drugs of abuse a..

Prepare a brief report comparing the sales volumes : Your supervisor has asked you to prepare a brief report comparing the sales volumes and the consistency of sales of these four salespersons. Use the mean sales for each salesperson to compare the sales volumes.

Explain the concerns of using stimulant drugs to treat adhd : Attention deficit hyperactivity disorder (ADHD) has received a lot of media coverage in the past ten years. One of the things most misunderstood about the disorder is the treatment. Children (and adults) afflicted with ADHD are often treated with ..

Compute the present value of the remaining lease payments : Compute the annual lease payment that would make the two alternatives equivalent. Ignore the nominal purchase fee at the end of Year 10.

Analyze basic applied psychological research : Write a three- to four-page article review in which you discuss methodological issues unique to psychological research and analyze basic applied psychological research relevant to the treatment of mental disorders.

Describe how technology is changing the customer service : Write a 500-750-word paper that identifies the major characteristics of services compared with goods, and describe how technology is changing the customer service and service offerings.

Compute the annual rental expense : Prepare the journal entry on January 1, 2011, if the lease is treated as a capital lease. What dollar amount represents an approximation of the fair market value of the automobiles?

Explain the concept of sustainable competitive advantage : MGT/230- What is strategic management? BE SURE YOU CAN • define competitive advantage, strategy, and strategic intent • explain the concept of sustainable competitive advantage.

User Account

All Pages